The Federal Energy Regulatory Commission is considering whether it should adopt new merger guidelines issued by antitrust regulators last summer.

FERC's review is in the earliest stage -- known as a notice of inquiry -- and it is far from offering a proposal. In March it asked for public comment, and the prospect of a major change has generated strong reaction from the power business, consumer advocates and state regulators.

Last August the Department of Justice and the Federal Trade Commission said the revisions were largely an update to reflect current practice as it had evolved since the guidelines were last changed in 1992. The changes gave antitrust regulators more leeway to challenge mergers than under the previous incarnation because they incorporated new tools to measure the competitive effects of mergers. However, they also raised thresholds for measuring whether a merger would cause anticompetitive concentration. By itself, raising the thresholds would give merging parties a better chance of winning approval for deals that antitrust regulators previously might have opposed. FERC is particularly interested in knowing whether it should revise its market screens, which are currently based on the 1992 antitrust levels.

Market concentration is based on the Herfindahl-Hirschman Index, or HHI, based on the market shares of all the firms in a specific market. Previously, regulators considered a market with an HHI of 1,800 or more (out of a possible 10,000) to be highly concentrated. Under last year's revisions, the threshold for a highly concentrated market was raised to 2,500. Before the revision, a merger that raised the HHI in a highly concentrated market by more than 100 points was viewed as anticompetitive. The revised guidelines now stipulate that it takes a 200-point change to be anticompetitive.

FERC can block mergers deemed anticompetitive under the 1992 HHI test unless the parties convince the agency that the transaction won't have anticompetitive effects; that entry by competitors is likely; that harmful effects will be offset by efficiencies; or that one of the parties to the deal is a failing firm.

The merging parties can also seek approval by offering concessions that mitigate the merger's harmful effects. In the pending merger of Exelon Corp. and Constellation Energy Group Inc., for instance, the parties have offered to divest three Maryland power plants and sell some 500 megawatts of baseload energy annually until 2015.

Adopting the new levels would seem to be an easy choice for FERC, since it would prevent a confusing inconsistency between the screens used by antitrust regulators and those used by the agency. But comments received May 23 from power industry players show sharp divisions. Large utilities have generally favored adoption of the higher screens, while smaller players and consumer advocates have opposed them.

The Edison Electric Institute, the trade group for major shareholder-owned utilities such as NextEra Energy Inc., the parent of Florida Power & Light Co., and PG&E Corp., the owner of Pacific Gas and Electric Co., favors raising the HHI thresholds but opposes adoption of the more open-ended aspects of the antitrust guidelines. EEI argues that FERC would be unable to complete more open-ended merger reviews and still meet its statutory 180-day timetable for ruling on deals.

Conversely, the Electricity Consumers Resource Council and the National Association of State Utility Consumer Advocates oppose raising the HHI thresholds because they would "dilute" FERC's current market power analysis. The American Public Power Association and the National Rural Electric Cooperative Association say raising the current thresholds would compound an already permissive regime. "The commission's existing thresholds rarely find market power," they wrote. "There is no evidence that the thresholds are too low."

Consultants at Brattle Group say FERC's inquiry offers a chance to adapt to changes such as deregulation of the wholesale market. Brattle Group's Romkaew Broehm says FERC should rely more on a principles-based approach to account for the differing ways suppliers do business. She notes that suppliers in regional transmission organizations such as the mid-Atlantic's PJM Interconnection or operators of independent systems usually do spot power transactions through a single-priced auction while suppliers outside those types of arrangements still trade via bilateral deals. Raising HHI levels is fine, she and her Brattle Group colleagues told FERC in their comments, but there should also be a hard look at factors such as transmission constraints, bidding behavior of merger applicants and the effect a merger might have over multiple time periods.

Whether a transaction is considered anticompetitive, she says, "depends on the circumstances of the markets the applicants are in and on the characteristics of their generation portfolio."

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Bill McConnell is the Washington bureau chief for The Deal magazine.